Pros and cons of guarantor loans

There are both good and bad points to consider when either taking out a guarantor loan or deciding to become a guarantor for someone else. A guarantor loan means someone else will vouch for the person taking out the loan, therefore providing extra security to the lender. It is not just a case of saying you trust the borrower. It is promising that you will take over any or all repayments of a loan should the borrower become unable to pay, up until the completion of the loan.

With any financial decision, it’s a good idea to sit down and list the pros and cons, so that you’re aware of what you might be stepping into. Money Guru, has done the research for you, so you can concentrate on reading and understanding all the advantages and disadvantages of guarantor loans.

The Pros

There’s a higher chance of a successful application

Having a guarantor is added security for the lender, so there’s a stronger chance your application will be accepted.

You could borrow more

Having the backing of a guarantor gives the lender extra peace of mind, so they’re more likely to lend you a larger amount.

It’s good for those with poor or little or no credit history

A guarantor loan allows those with poor credit history to add security to their repayments and so are a great option for those with bad credit. It’s also commonly used for those with little or no credit history, such as young adults buying their first home.

It could boost your credit rating

Whenever you manage credit well, it should reflect in your credit rating. Making guarantor loan repayments in full and on time could go some way to repairing a poor credit history. Many lenders also offer you the option of making overpayments or repaying your loan early without additional charges, which gives you the option of reducing your loan term and total repayment cost.

The Cons

Like all borrowing, taking out a guarantor loan comes with risks and in this case, you not only take on these risks yourself but share them with your guarantor too. Here’s what you need to know before you both sign on the dotted line.

You’ll need to be open and honest about your financial situation

Talking to those close to us about money problems can often make for uncomfortable conversations. You may not want to admit to those around you that you’ve had problems with credit in the past or that you’re struggling to get the loan you need. For someone to agree to be your guarantor you’ll need to have a frank and honest discussion with them about your financial situation and if they agree to be your guarantor, they’d need to be quite open about theirs.

Interest rates aren’t low

Interest rates on guarantor loans are typically higher than standard personal loans which means this type of borrowing isn’t cheap. And remember, you’re not guaranteed the headline rate advertised on any loan. If accepted, you could be offered a higher rate.

Credit ratings can be affected

If you fail to make payments regularly and on time, your guarantor will be asked to step in. Both you and your guarantor could have negative marks made against your credit reports, which would have a negative impact on your credit scores, although it won’t usually affect your guarantor’s rating unless they too default on payments.

You could burn bridges

Finding someone who is willing to be your guarantor may take a little time and the process could ruffle a few feathers among your friends and relatives. If for any reason you default on payments it would leave your guarantor liable for the debt. This would more than likely put an unnecessary strain on your relationship. You will need to place your trust in your guarantor, and they will need to place their trust in you. Unexpected things can happen, even in the best of circumstances, so be aware of the strain and difficulties this could cause a relationship and think about how you might handle it if things take a turn for the worse.

If you’re ready to take the next step and start comparing potential lenders and deals, take a look at our moneymatcher. Enter your details and in just a few seconds you’ll be able to view a tailored selection of guarantor loans. All of this without a credit mark being left on your file.

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